Baseline Scenario

(c) 2009 F. Bruce Abel

Simon Johnson here of course, and was on Bill Moyers for 1/2 hour last night. The topics and intelligent discussion are worth spending the weekend on, but I'm nevertheless going to Keeneland and watching football.



The Baseline Scenario
What’s Wrong with a Phone Call?
What Is Consumer Freedom?
Tonight On Bill Moyers Journal, This Morning On NPR, And Louis Brandeis
What’s Wrong with a Phone Call?
Posted: 09 Oct 2009 07:52 AM PDT
Yesterday Simon pointed out the AP story highlighting Tim Geithner’s many contacts with a few key Wall Street executives — primarily Jamie Dimon, Lloyd Blankfein, Vikram Pandit, and Richard Parsons — while leading the government’s rescue efforts as Treasury secretary. It’s certainly useful for the nation’s top economic official to talk to people in the banking industry, and it’s also useful for him to talk to banks that are being bailed out by the government. But the AP story did come up with a few important distinctions. Geithner talked to these Wall Street executives more than the key people in Congress — Barney Frank and Christopher Dodd — that he needs to pass his regulatory reform plan. And he talked to them much more than to, say, Bank of America, which is equally big and equally in debt to the government. So to be clear, Geithner is talking to these people more than dictated by the requirements of his job (or he’s not talking to Ken Lewis enough).
Still, you could say, what’s wrong with that? Can’t Tim Geithner talk to whomever he wants to talk to?
Of course he can, in a legal sense, and no one is saying he is doing anything illegal. All the evidence is that Geithner is a man of unassailable integrity, and a modest, courteous guy to boot.
But as the lobbyists have known for decades, the key to political power in the United States is access. Under-the-table bribes are relatively rare. The revolving door (government officials taking lucrative jobs at the companies they used to oversee) is important, but of little use when it comes to the very top people. Paul O’Neill, John Snow, and Henry Paulson were already easily rich enough to overlook such temptations (although Snow did leave Treasury to become chairman of Cerberus); Geithner may not be a mega-millionaire, but he already turned down his shot at being CEO of Citigroup in 2007.
Instead, if you want to sway some of the top people in government, the most important thing is to talk to them. All of us are influenced by the information and opinions that we are exposed to. Many people have a tendency to agree with either the first person or the the last person they spoke to on a particular issue, regardless of what other information they take in. (Where Geithner falls on that spectrum I have no idea.) This is why lobbyists make so much money; they sell access.
If, in the midst of a financial crisis, you get a disproportionate share of your advice from a few select Wall Street veterans with enormous personal interests in your decisions, you will be swayed a certain way. This is particularly worrying if you have spent the last several years even more deeply steeped in that circle, because you will be getting information and ideas that are confirming your prior beliefs. It is also worrying if, as was the case this past year, you do not have the time for detailed fact-finding or empirical studies, and instead you have to make important decisions based purely on logic and conjecture. Instead, you (and the public) would be better served going out of your way to talk to people who do not share your prior perspective and are likely to disagree with you. Now, the Obama administration is nowhere near as bad as the Bush administration, which disdained talking to its critics; this administration has reached out to its intellectual opponents, for example in the famous White House dinner with Krugman and Stiglitz. But one dinner does not balance eighty phone calls.
There’s nothing scandalous about the fact that Tim Geithner talks to the CEOs of Goldman, JPMorgan, and Citi a lot. It’s just a fact. It’s a fact that demonstrates the deep linkages between the thinking inside Treasury and the thinking on Wall Street (and yes, I know Citi and JPMorgan are in Midtown). It’s also one reason I have little interest in conspiracy theories — who needs a conspiracy when you have a sympathetic ear in the Treasury Department that you can get access to regularly? As we’ve said before, the key factor throughout this financial crisis has been political power. And if that power is composed of the power of ideas and the power of relationships, so much the better.
By James Kwak

What Is Consumer Freedom?
Posted: 09 Oct 2009 03:30 AM PDT
This guest post was contributed by Lawrence B. Glickman, who teaches history at the University of South Carolina. He put the fight for the Consumer Financial Protection Agency in historical perspective in his previous post on this blog.
A recent ad taken out by the “The Center for Consumer Freedom” marks the latest assault by business lobbyists and conservatives on the idea of consumer protection. This organization’s motto — Promoting Personal Freedom and Protecting Consumer Choice — defines consumer freedom as “the right of adults and parents to choose how they live their lives, what they eat and drink, how they manage their finances, and how they enjoy themselves.”
Like other critics of consumer protection, this organization (“supported by over 100 companies,” according to its website) speaks in the name of freedom and depicts consumer protection as an assault not only on the liberty but on the intelligence of ordinary people. The ad begins with the following rhetorical question, “Are you too stupid…to make good personal decisions about foods and beverages”? Arguing against the “campaign to demonize soda” the advertisement blasts “food cops and politicians” for “attacking food and soda choices they don’t like.” Another of their ads warns about “Big Brother” in the “Big Apple” because New York City is considering taxes on junk foods and sugar-laden sodas. [The group's print ads can be seen here.]
A nearly identical line of criticism is currently being deployed against President Obama’s proposed Consumer Financial Protection Agency. Richard Shelby, the Republican Senator from Alabama, finds the proposal “disturbing and somewhat offensive” because it relies on the “concept of the intellectually deficient consumer.” Jeb Hensarling, a Congressman from Texas, worries that “un-elected bureaucrats” might “decide if we can have a credit card.” Scott Garrett, his fellow Republican colleague from New Jersey, is worried about the “Orwellian, government-bureaucrat-knows-best mentality” evinced by the proposal.
Opponents of consumer protection have long spoken in the name of individual liberty. They have done so by misconstruing the nature of human agency and freedom in the modern world.
At least as far back as the Progressive era, many Americans noted that industrial society–in which consumers did not produce their own food and drink and often lived far from such sites of production–called for federal regulation and protection to insure that the food we bought was safe. This was the essence of the landmark 1906 Pure Food and Drugs Act and it was the meaning of presidential candidate Woodrow Wilson’s statement in 1912 that “freedom today is something more than being let alone. The program of a government of freedom must in these days be positive, not negative merely.” Wilson and other progressives–-including members of the Republican Party, such as Theodore Roosevelt–-recognized that extending freedom in the twentieth century required a federal government capable of regulating business. In Wilson’s view, federal regulation of the sort provided by the 1906 Pure Food law did not substantially restrict the freedom of individual Americans. It instead instilled confidence that the market for food and drugs would be stripped of poisonous and dangerous goods.
The freedom that is restricted by consumer protection laws is the freedom of businesses to sell dangerous or even poisonous goods. By preserving confidence in the marketplace, such regulations allow consumers the freedom to make choices, and therefore esteem the intelligence of the American people.
Of course, regulation can become excessive and Americans need to balance individual autonomy with federal protection. (So too can federal assistance go in the other direction: one of the reasons businesses ply Americans with unhealthy food is that subsidies to agribusiness make possible the cheap production of high fructose corn syrup. Thus, these defenders of the free market ignore the inconvenient fact that the playing field is not truly level.) The claims of business lobbyists that common sense regulation amounts to incipient totalitarianism, however, demonstrate their unwillingness to accept what has become over the last century a fundamental part of the social contract, and which makes tangible true freedom of choice.
By Lawrence Glickman

Tonight On Bill Moyers Journal, This Morning On NPR, And Louis Brandeis
Posted: 09 Oct 2009 02:52 AM PDT
On PBS this evening (first airs at 9pm eastern; on the web from about 10pm), Bill Moyers, Rep. Marcy Kaptur, and I discuss where we stand – and what we’ve learned – a year after the US financial system almost collapsed.
There’s a detailed preview on Bill’s website – our conversation moved back-and-forth between people losing their homes in Ohio, how bank behavior brought us to this point, and where we go from here.
We also discussed the latest revelations that, at the height of the crisis earlier this year, Treasury Secretary Tim Geithner spoke primarily to a very small group of top bankers (at Citi, Goldman, and JP Morgan). Further implications are taken up in my Daily Beast column this morning.
Also today, coincidently, on NPR’s morning edition (about 21 minutes into the first hour; will be on-line around 9am), Alex Blumberg, Charles Calomiris, and I role play whether the administration’s reform proposals are “Jamie Dimon-proof”, meaning that Too Big To Fail will really be brought under control. I’m Jamie Dimon, Charles is Charles, and Alex is the President. It doesn’t go well for the taxpayer.
On behalf of the administration, Diana Farrell (Larry Summers’s deputy at the National Economic Council, NEC) responds by saying effectively: “big has its benefits”, and the best we can hope for is to regulate our massive banks. As I said in my NYT Economix column yesterday (reproduced after the jump here), I take the position of Louis Brandeis on this one: our biggest banks have simply become Too Big To Regulate.
The NPR story didn’t get into the tragic human dimensions of the crisis, but Rep. Kaptur was forceful on this point during the Moyers conversation. In part, this strengthens the case for a consumer protection agency focused on financial products - a point on which we agree with Ms. Farrell and her colleagues.
But, hopefully, senior staff at the NEC will have a chance to review the Moyers segment (it only takes 30 minutes or so) and reflect on whether big banks are really ever so beneficial when they make, facilitate, and now refuse to renegotiate loans that have ruined so many lives.
Big is Bad Again
At about this time after the near-collapse of its banking system, any democracy goes through a phase of soul-searching regarding its broader economic model. Around almost every water cooler in the U.S., people ask: Does the severity of our financial crisis reflect the disproportionate influence of a few incompetent investment bank executives, something about how dangerous our financial sector has become, or a deeper breakdown of capitalism?
The deeper breakdown view is, without doubt, gaining center stage – debated now in movies, TV, and radio shows. And of course this position is not just about the crisis; it builds on serious longer term concerns, particularly rising inequality, that are real and quite disturbing.
At least in general terms, opinion leaders begin to point the finger at big corporations, including both their stupidity and greed in economic terms and their ability to generate political cover through campaign contributions and simply stunning amounts of lobbying.
The US experienced a similar phase of reaction against “bigness” in the early 20th century, spurred both by the 1907 financial crisis (which led, among other things, to the creation of the Federal Reserve, at the time a radical new component of the US capitalist system) and also by the rise of industrial trusts – huge companies that began to form in the 1890s and which, by 1910, dominated the American commercial landscape.
In the 1912 Presidential campaign, there were three main views on how to handle mega-trusts: do nothing (President Taft), build up federal power to counterbalance and regulate concentrated industrial power (ex-President Theodore Roosevelt, running as the Bull Moose Progressive independent candidate), and break up big companies to reduce their power (Woodrow Wilson, advised by Louis Brandeis).
Brandeis’s views are the most relevant for our modern discussion. In 1985 Thomas McCraw won a Pulitzer Prize for Prophets of Regulation, in which he criticized Brandeis for not understanding basic economics when he argued that big business was too big to manage effectively and undermined the individualism that was essential to American democracy.
McCraw rightly pointed out that some big U.S. firms have been well run over the past century – in fact, many of the best jobs in this country continue to be with large employers (look at the pay packages and benefits around you). It’s also true that the undoubted power of major corporations has not prevented waves of productive technological change, mostly brought to us by start-up entrepreneurs.
But Brandeis was right on the politics of size and what that meant in turn for the US economy – and he is very much in tune with the cutting edge of modern economics. When large firms can (1) shape their regulatory environment, (2) take advantage of lax regulation to take on more risk than they can manage, and (3) “put” the downside losses onto the taxpayer, we should be very afraid.
This exact problem has repeatedly slapped us in the face over the past 12 months with almost every development in the financial sector, and it remains inherent in every “too big to fail” bank. Brandeis was exactly right on the dangers that could arise from the financial system – even though he could not foresee how the creation of the Federal Reserve would, when combined with weak regulation, lead to even worse outcomes.
But we should not suffer another failure of imagination or apply Brandeis to our modern circumstances too narrowly. The problems before us now are not limited to the financial sector. Just as Brandeis argued, beginning with a piece entitled “Our Financial Oligarchy” in Harper’s Weekly, November 1913, we have allowed other parts of our economy to become “too big to regulate”. Any company that can set its own rules and then behave in a reckless fashion is potentially very damaging to both prosperity and democracy.
Teddy Roosevelt thought you could regulate and control monopolies, and his idea that “big corporate” could be controlled by “big government” was taken forward with some success by FDR, the reforms of the 1930s, and the way our system operated for 30-40 years after World War II. But the complete breakdown of financial regulation under great political pressure in the 1980s and 1990s should serve as a wake-up call, both with regard to banking and much more broadly.
We need to go back to Brandeis who, with his extensive experience on the interface between politics and law, thought that breaking up big firms was essential: “We believe that no methods of regulation ever have been or can be devised to remove the menace inherent in private monopoly and overweening commercial power” (Urofsky, p.346).
If we can update and apply Brandeis to finance and more broadly, we still have a chance to save the positive features of our American model.
By Simon Johnson
The material after the jump is a slightly edited version of my NYT Economix column yesterday. Anyone seeking to republish that material in its entirety should seek permission of the NYT. However, the material before the jump can be distributed freely, subject only to providing an appropriate credit and a link back to BaselineScenario.